With Independent Financial Adviser, Nick Plumb
Barry from Stowmarket asks: “I have just started receiving my state pension and I already had an annuity that pays me £14,000 a year that I purchased with a personal pension. The state pension is paid to me with no deduction for tax, but my annuity has tax deducted and is paid to me net. Why is there a difference and should I be paying income tax at all?”
The bottom line is, you will pay a certain amount of tax on both pensions, as your total income per annum is above your personal tax allowance, which is £11,850 in the current 2018-19 tax year. Although pensions are a very tax-efficient method of saving for retirement and you benefit from tax relief on your contributions into them, once you retire, the income produced by an annuity or from flexible drawdown is classed as ‘earned’ income and is taxable if it and any other income you have exceeds the personal allowance.
Your state pension is paid to you gross (before income tax is deducted), but this does not mean that you do not pay any income tax on it. The income tax is actually collected by an adjustment to your tax code. Check your last notice of coding and you will see that your tax code has changed. Tax is deducted in this way because the pension system would not be able to cope with working out everyone’s income tax as well as making sure they received the correct pension payment. They therefore leave the tax to the Inland Revenue, who alter your tax code to compensate.
The annuity you receive will be taxed at source by the annuity provider, which means that tax has already been deducted before it is paid to you.
It is important to check that you have been put on the correct tax code in relation to your income. I have seen many examples of people paying far too much tax in retirement over the years. You should also ensure that the annuity company are aware of your correct tax code for the same reason. If you are in any doubt about your tax code, seek assistance from an IFA who specialises in pensions, or from an accountant.
Nick Plumb is an Independent Financial Adviser. Send your questions to Nick at Plumb Financial Services, Baylham Business Centre, Lower Street, Baylham, Suffolk IP6 8JP, email them to firstname.lastname@example.org, or telephone Nick on 01473 830301. Nick’s answers to reader questions in this column are provided only as a general guide and do not constitute personal financial advice. Any readers who require specific advice should contact Nick to arrange a complimentary initial meeting to discuss their own position. Plumb Financial Services are regulated by the Financial Conduct Authority.